RIVES Boise, Idaho 83702

STOELRIVES

LLP

ATTORNEYS AT LAW

May 27, 2015

Deputy AdministratorUSDA/AMS/Dairy ProgramsSTOP 0231, Room 29711400 Independence Ave. SWWashington, DC 20250-0225

101 S. Capitol Boulevard, Suite 1900

Boise, Idaho 83702

main 208.389.9000

fax 208.389.9040

www.stoel.com

NICOLE C. HANCOCKDirect (208) 387-4231

[email protected]

Re: Amended Supplemental Proposal for California Milk Marketing Order

Dear Deputy Administrator:

I write on behalf of the California Producer Handlers Association ("CPHA"). CPHA is

made up of four Producer-Handler (also known as Producer-Distributor)1 dairy farm families:

Foster Dairy Farms, Inc. ("Foster Dairy"), Hollandia Dairy, Inc. ("Hollandia Dairy"), Producers

Dairy Foods, Inc. ("Producers Dairy"), and Rockview Dairies, Inc. ("Rockview"). These are the

only dairy Producers2 who also process or handle their milk for delivery to consumers. The

vertical integration of these entities is unique as compared to other dairy Producers in California,

and in recognition of that uniqueness they were granted a Quota3 that is exempt from the

California Pooling Act dating back to the enactment of the Pooling Act in 1967.

For approximately 48 years, Producer-Handlers have held a Quota exemption for a

limited portion of their Class 1 milk, which is exempted from being part of the California milk

pool as part of the overall Quota System in the Pooling Act. They have structured their

businesses around their exempt Quota allocations, and invested millions of dollars to obtain and

maintain those exemptions. CPHA submits this proposal to preserve the Producer-Handler

Producer-Handler is defined as "[a] dairy farmer who processes and sells milk from his or her own production. A

P-H may also purchase milk from other dairy farmers for processing. A producer-handler is usually exempt from

minimum pricing provisions on some of his or her milk but is required to make reports, maintain records and prove

this status as a producer." California Department of Food and Agriculture, Appendix: Glossary of Dairy Terms,

http://www.cdfa.ca.gov/dairy/appendix.html (last visited Apr. 2, 2015) (attached hereto as Exhibit A).

2 A Producer is "[a]ny person that produces milk from five or more cows in conformity with the applicable health

regulations of the place in which it is sold, and whose bulk market milk is received, acquired, or handled by any

handler or any nonprofit association of producers. In California, a cooperative is considered a single producer." Id.

3 Quota means "[p]art of a two-tiered pricing system in California. Essentially, quota is an entitlement that allows a

producer to receive a price for milk that is $1.70 per hundredweight higher than the overbase price." Id.

79052435.2 0055675-00001Alaska California Idaho

Minnesota Oregon Utah Washington

Deputy Administrator, USDA/AMS/Dairy ProgramsMay 27, 2015Page 2

Quota exemption in any Federal Milk Marketing Order ("FMMO") adopted in California as it is

an integral part of the California Quota System contemplated for preservation by the 2014 Farm

Bill.

Background

The State of California is the largest milk-producing state in the country, representing

more than 20% of national milk production. Milk and dairy products are the leading commodity

group in California agriculture. The California Department of Food and Agriculture ("CDFA")

has regulated milk production in California separate and apart from the federal government for

over 80 years.

The United States Department of Agriculture ("USDA") is now considering whether to

establish an FMMO for the State of California. The Agricultural Act of 2014 ("2014 Farm Bill")

specifically permits California to keep some aspects of its unique milk marketing system,

including the Quota, if any FMMO is adopted for California. The purpose of this section is to

provide a general overview of milk regulation in California, which has always been different

from federal milk regulation. Any FMMO for California must account for the unique history of

milk regulation in California, and the multiple legislative compromises that the current Quota

system embodies, which necessarily includes both types of Quota in the Quota System.

I. Farm Bill and Authority to Maintain "Quota System"

The 1996 Federal Agriculture Improvement and Reform Act ("1996 Farm Bill") provided

the USDA with the authority to designate an FMMO for the State of California. The 1996 Farm

Bill stated, in pertinent part: "Upon the petition and approval of California dairy producers . . .

the Secretary shall designate the State of California as a separate Federal milk marketing order.

The order covering California shall have the right to reblend and distribute order receipts to

recognize quota value." 7 U.S.C. § 7253(a)(2) (emphasis added). The 1996 Farm Bill contained

a deadline for the USDA to consider the designation of an FMMO for California. 7 U.S.C. §

7253(b)(2). The 2014 Farm Bill repealed the deadline that was in the 1996 Farm Bill. It thus

reopened the opportunity for a party to petition the USDA to adopt an FMMO for California.

The Conference Report that accompanies the 2014 Farm Bill includes a "Joint

Explanatory Statement of the Committee of Conference" that reflects the intent of the drafters. It

states in pertinent part: "The Managers intend for the Secretary to conduct a hearing prior to the

issuance of an order designating the State of California as a Federal milk marketing order. The

provision provides the Secretary of Agriculture with the discretion, i f a California Federal milk

marketing order is requested, to recognize the longstanding California quota system, ["Quota

79052435.2 0055675-00001

Deputy Administrator, USDA/AMS/Dairy Programs

May 27, 2015Page 3

Systeney established under state marketing regulations, in whatever manner is appropriate on

the basis of a rulemaking hearing record." (Emphasis added.)

As we understand the current proposals, the USDA, through a California FMMO, will

suspend any duplicative portions of the California Pooling Act, but retain any portions of the

California Pooling Act that are not duplicative and consistent with the California FMMO. For

that reason, it is helpful to have a historical overview of the California Pooling Act.

Legislative History of Milk Regulation in California

California has operated a milk marketing order unique from the federal order system

since the passage of the Young Act in 1935. As with all milk market orders, the programs are

designed to establish minimum prices, based on ultimate utilization, that Handlers must pay for

market-grade milk received from dairy farmers. California's milk marketing order breaks the

Producer-Handlers into two groups. As described below, Producer-Handlers in California have

held a portion of their milk as exempt from Pooling (defined infra note 8) due to the different

market and pricing relationships with the end buyer of their milk.

A. Stabilization Act

In 1934, the California Legislature enacted the California Milk Stabilization and

Marketing Act, Cal. Food & Agric. Code § 61801, et seq. ("Stabilization Act"). The purpose of

the Stabilization Act was to protect dairy farmers from drastic price fluctuations and predatory

pricing while allowing consumers to purchase milk at low prices.

The Stabilization Act divided milk into four classes, each priced differently, with Class 1

having the highest price and Class 4 having the lowest.4 Under the Stabilization Act, Producers

sold their milk by contracting individually with processors (also known as Handlers).5 Since the

4 Classes of milk in California:Class 1 - Fluid productsClass 2 - Heavy cream, cottage cheese, yogurt, and sterilized products

Class 3 - Ice cream and other frozen productsClass 4a - Butter and dry milk products, such as nonfat dry milk

Class 4b - Cheese, other than cottage cheese, and whey products

5 Handler is defined as:A person (other than a cooperative association) who operates one or more pool plants or

operates any other plant from which Class 1 milk is disposed of directly or indirectly

during the month in the marketing area.

79052435,2 0055675-00001


May 27, 2015Page 4

various classes of milk were priced differently, individual Producers fared differently depending

upon the type of contracts they were able to obtain, despite all having produced the exact same

product. Producers who were able to obtain contracts for Class 1 milk fared quite well and were

able to make a profit. However, Producers who were only able to obtain contracts for Class 2, 3,

and 4 products fared less well even though they were selling the same quality milk. Since

production costs were largely the same for all Producers in a given area, a Producer's financial

welfare was related directly to the proportion of Class 1 milk contracts it was able to obtain.

This resulted in extreme competition for Class 1 contracts, which led to many abuses by

Handlers and distributors and distorted the market balance.

B. 1967 Milk Pooling Act

In response to the competitive abuses discussed above, the Legislature enacted the

Gonsalves Milk Pooling Act, Cal. Food & Agric. Code § 62700, et seq. ("Pooling Act"), in 1967.

The Pooling Act, which went into effect in 1969, sought to equalize the disbursement of revenue

among Producers.

Under the Pooling Act, the prices that Producers received for their milk were no longer

dependent on the classification of products that their milk was used to produce. Instead,

Producers were paid based on the amount of production in each of three categories: Quota, Base,

and Overbase. The pooling system guaranteed that every Producer could sell a minimum

amount of milk each year at the highest market price, referred to as Quota, which was generally a

higher value than the other classes of milk because it was based on the Producer's historical

Class 1 milk sales. Additionally, Producers were also given another level of milk assignments

that would be guaranteed to be paid at a certain formula price scheme, known as Base.6

Anything produced over the Quota and Base amounts would be paid based on a formula for

pricing called the Overbase.7 When the Pooling Act went into effect, Quota and Base were

A person who operates a milk plant located in the marketing area and receives market

milk from one or more dairy ranches.Appendix: Glossary of Dairy Terms, supra.

6 Base is the amount of assigned milk production that is established for each Producer in which the Producer

receives a higher price. Base-Excess Plan means a "pricing plan to encourage producers to adjust their production to

a desirable seasonal pattern. It involves the annual (re-) assignment of a production base that reflects that producer's

deliveries during a specified period of time of year when demand for milk is strong. The producer then receives a

higher price for milk produced up to the amount of the production base and the 'excess' or surplus price for

additional supplies. A base-excess plan typically is authorized and administered under a federal order, but it may be

established by a cooperative for its members." Id.

7 Overbase means "[o]ne price of a two-tiered pricing system in California; quota is the other price. Essentially,

79052435.2 0055675-00001


May 27, 2015Page 5

assigned to each Producer based on its historical Class 1 sales and overall production sales. In

order for the Pooling Act legislation to pass, it was imperative that some accommodations be

made to protect the farms that had established their own production and processing businesses

(Producer-Handlers). As vertically integrated production and processing companies, the

Producer-Handlers had established the largest share of Class 1 milk sales prior to the enactment

of the Pooling Act legislation; therefore they would become the source of at least some of the

profits that would be used to eliminate the inequity in prices for the Producers.

The Pooling Act created an accounting system known as Pooling8 to reconcile the prices

that Handler firms paid and the prices that Producers received. Under this system, a Handler

paid a price for milk based on the applicable Quota, Base, or Overbase price. If the Handler

made products with higher classified prices, it had to pay the difference into the pool. If the

Handler made products with lower classified prices, it received a refund from the pool.

The Pooling system ensured that Producers received payments based on their holdings of

Quota, Base, and Overbase, rather than on how their milk was used. In essence, it leveled the

playing field for all Producers. The system also guaranteed that Handlers would not be hurt

financially by having to pay Quota prices if they were manufacturing a product that did not

require Quota class of milk. The system was designed so that neither Handler nor Producer

suffered or benefited from the other's financial position.

III. 1967 Producer-Handler Quota System

The Pooling Act created a Quota System that recognized the difference between the

Producers' and the Producer-Handlers' relationships with their end buyers. On the one hand, the

Producer-Handlers' relationships were with the ultimate consumers who purchased finished

branded products, while on the other hand the Producers' relationships were with Handler

companies who would process the raw milk into a variety of products.

As a result, the Pooling Act created the Quota System to address both Producers and

Producer-Handlers: Regular Quota for Producers, and Exempt Quota for Producer-Handlers.

overbase is the basic pool price and is calculated using milk sales and usage data." Id.

8 Pooling is a "[m]ethod used in determining how funds in a market will be distributed among producers supplying

the milk. While there are three methods of pooling returns to producers (individual handler pool, market-wide

(statewide) pool and cooperative pool), only the statewide pool operates in California." Id. Marketwide Pooling is a

ImJethod of calculating the blend price paid to producers on the basis of the usage of all the milk received by all

handlers in the market. The announced California pool prices (quota and overbase) apply to all producers,

independent of how the milk was used by the handler who received it." Id.

79052435.2 0055675-00001


May 27, 2015Page 6

A. Regular Quota for Producers

Producers who do not process their own product have a different relationship model with

their customers than the Producer-Handlers. The Producers' customers are the milk Handlers.

Prior to the enactment of the Pooling Act, Producers preferred to sell Class 1 milk because it

brought the highest prices/margins; the other milk classes were priced lower. Many Handlers of

Class 1 milk appreciated their leverage and demanded kickbacks from the Producers, or

threatened that they would not accept the milk. In those instances, Producers were stuck

between giving a kickback, taking a reduced price for a lower class of milk, or being left with a

perishable product. The Handlers' destructive trade practices and disparity in bargaining power

drove the Pooling of milk revenues as a way to eliminate the price inequities and Handler control

over the Producers. But these same risks were not at issue with Producer-Handlers who

processed their own product, and that is why the Pooling Act allowed the Producer-Handlers to

treat at least a portion of their Quota as exempt from the milk pool.

All Producers received Quota for the Class 1 sales that were reflective of how they

operated their businesses, reflective of their relationships with their end buyers, and based on

their historical production.

B. Exempt Quota for Producer-Handlers

The Pooling Act recognized Producer-Handlers' vertical integration by defining Exempt

Producer-Handlers recognizing their vertical integration warrants at least some of their raw milk

to be exempt from Pooling. The vertical integration works as follows: Producer-Handlers

produce their milk (and sometimes purchase additional volumes), process the milk into final

consumer products, and deliver the products to the customers. As Handlers, the Producer-

Handlers created their own markets by establishing relationships with the customers and built up

the Class 1 markets over many years. As Handlers for the Class 1 products, the Producer-

Handlers generated their own markets by marketing and creating brand recognition of their own

products, even tailoring final products to specific customer needs. There was a historical

connection between their farms and the consumers that allowed the Producer-Handlers to create

and expand the Class 1 markets over time, which continues today. As a result, the Pooling Act

Quota System allows the Producer-Handlers to treat some of their Quota as exempt from Pooling

because the Producer-Handlers operate differently than the Producer-only dairies and were not

subject to the same risk and control by Handlers as Producer-only farms.

The Pooling Act gave Producer-Handlers a Quota that was in part exempt from the milk

pool prices to cover the production from their own cows. The exempt Quota was not subjected

to the price dilution that the rest of the Producers' Quota would incur because the Producer-

79052435.2 0055675-00001


May 27, 2015Page 7

Handlers priced their own Class 1 products based on their own production, processing, branding,

and customer relationships. This allowed the Producer-Handlers the opportunity to maintain the

Producer-Distributor model that they had already created. When the 1967 Pooling Act was

originally passed, Quotas were assigned to all Producer-Handlers based on their historical

production of Class 1 milk, and that assigned Quota was permitted to be treated as exempt. The

Producer-Handlers were also assigned a Base number that was subject to the pool, and any

Overbase production was likewise subject to the pool. Only the assigned exempt Quota was

exempted from the pool.

IV. CDFA Administration of Pooling Act

The CDFA is tasked with administering the California Pooling Act under the state order

system. The CDFA Milk Pooling Plan ("Plan") contains the following definitions relevant to

Quota and Producer-Handlers:

• Quota milk is defined to mean "that amount of fact and solids not fat contained in

pool milk delivered by a producer during the month which is not in excess of the pool

quota of such producer computed pursuant to Section 110 multiplied by the number

of quota eligible days in the month." Plan § 115.

• Exempt Producer-Handler is defined to mean "any person who qualifies and

continues to qualify under the appropriate options to be excluded from the pool,

pursuant to the-provisions of Article 6." Plan § 121.

• Producer-Handler is defined for purposes of the Plan in Article 6 and Article 6.5.

Plan § 129.

Here are the provisions of the Plan relating to Option 70 Producer-Handlers:

Section 650. A producer-handler, for the purposes of this article,shall also include, as a separate and distinct category of producer-handlers, any producer and any handler who purchases or handles

market milk or market cream produced by such producer if theymeet the requirement that all of the ownership of the handler andall of the ownership of the producer is owned by the same person

or persons and their ownership in the producer or handler is at least

95 percent identical for each person with their ownership in the

handler or producer. Such ownership shall not exceed ten

79052435.2 0055675-00001


May 27, 2015Page 8

individual persons or owners of equitable interest in a partnership,

corporation, or other legally constituted business association.

Section 651. The ownership required by this article may be

through a partnership, corporation, or other legally constituted

business association so long as the entities are owned by the same

person or persons, and there is at least 95 percent identity of

ownership for each person with their ownership in the handler or

producer. For the purposes of this article, a "person" or "persons"

includes the spouse, or other persons of lineal consanguinity of the

first or second degree or collateral consanguinity to the fourth

degree, and their spouses, and includes an adopted child the same

as a natural child and kindred of the half blood equally with those

of the whole blood of the owner and ownerships by persons so

related shall be considered single ownership by one person. For

the purpose of this article, property pledged or hypothecated in any

manner to others shall be considered "owned" so long as equitable

ownership with management and control remain with the producer-

handler.

Section 652. Ownership, as provided in this article, shall have

existed at the time of the base period selected by the producer

under Section 107, and at all times thereafter.

Section 653. Any producer-handler qualified under this article

may, no later than August 5, 1969, notify the secretary of the

election:

(a) To join and operate wholly within such pool; or

(b) To have the entire original production base and pool quota

determined during the base period selected as a producer, pursuant

to Sections 108 and 110, established as a part of such Pooling Plan,

9 You will note that this section includes the consanguinity limitation that our client does not want the USDA to

adopt as part of its proposed FMMO. This limitation comes from the Pooling Act, Cal. Food & Agric. Code §

62708.5(b). However, if the consanguinity limitation is reserved as part of the California Pooling Act and not

covered under a California FMMO, then the CPHA will voluntarily withdraw this aspect of our proposal from our

FMMO amended supplemental proposal.

79052435.2 0055675-00001


May 27, 2015Page 9

and nevertheless elect to operate entirely outside of the pool to the

extent of the provisions of Section 654.

Section 654. Any producer-handler who elects to operate outside

the pool pursuant to Paragraph 653(b) shall have its quota milk

deducted from its own Class 1 usage, plus a further daily deduction

from such usage of 150 pounds of milk fat and 375 pounds of

solids not fat, before being required to account to the pool, even

though the average Class 1 usage in the pool for that month may be

less than 100 percent of the quota milk in the pool.

Section 655. The fact that a producer-handler qualifies as to one

of its milk production operations under this article does not prevent

the producer-handler from operating on an entirely separate

nonqualifying basis at other milk production facilities, and with

other nonqualifying persons at such other milk productionfacilities. A producer-handler can neither buy nor sell the option

granted under this article, but this shall not prevent the producer-

handler from purchasing or selling pool quota or production base

as otherwise provided in this Pooling Plan.

Section 656. If at any time, ownership, as defined in this articleceases, the producer-handler shall no longer be eligible for the

option in this article and shall account to the pool as a separatehandler and shall be entitled to reentry into producer participation

in the pool on the same basis as a producer-handler may, under

Sections 602 and 605, or the producer-handler may elect tobecome an exempt producer-handler provided the entity qualifies

under the provisions of Section 604.5.

Section 657. Pool quota exempted under this article shall not be

subject to the provisions of Article 9.1 and Article 9.2.

In other words, the above provisions pertaining to Exempt Producer-Handlers and their

portion of the Quota System require the Producer-Handlers to maintain both arms of their

business (Producer and Handler) in the same family as the original owners who owned the

Producer-Handler business when the exempt Quota was established. Producer-Handlers cannot

sell their businesses without losing the treatment for their exempt Quota. Producer-Handlers

79052435.2 0055675-00001


May 27, 2015Page 10

cannot sell their Quota without losing the treatment for their exempt Quota. Producer-Handlers

cannot separate the Producer-Handler arms of their business into different owners without losing

the treatment for their exempt Quota. Even transfers down family lineage become troublesome

because the total ownership cannot exceed 10 and must stay within four degrees of consanguinity

(first person to great-grandfather is four degrees of separation). In sum, Producer-Handlers have

had to make conscious ownership structural decisions and strategic business choices over the

past 48 years since the Pooling Act was enacted in order to maintain any Quota treated as

exempt.

If a Producer-Handler did not comply with the requirements to maintain its exemption

treatment for its Quota, that Quota became regular Quota that would forever be subject to

Pooling. Therefore, to maintain a Quota exemption treatment, it is imperative for any Producer-

Handler to comply with all exemption requirements.

V. 1978 and 1993 Legislative Amendments to the Pooling Act Expanded Quota System

When the Pooling Act was enacted, it was anticipated that new Quota would be issued in

order to equalize Class 1 revenue among Producers. The goal of the Pooling Act was for all

Producers to sell a similar percentage of their milk production as Quota milk (either as exempt or

non-exempt, depending on whether the Producer also was a distributor of its milk). The Pooling

Act thus provided the Department of Agriculture with the authority to create new Quota as Class

1 sales expanded.

In 1978, the Pooling Act was amended to allow Producers to equalize their Quota

holdings at 90% of their production base. As new Quota was assigned for Class 1, it allowed the

Producer-Handlers to be assigned new exempt Quota based on their continued actual production

and distribution. Thus, the exempt Quotas for the Producer-Handlers grew as well as the new

Quota assigned to the other Producers, but only based on the assigned Quota production allowing

the lower Producers to catch up in the percentage of pooled milk they produced. Base Quotas

were not increased with this amendment. But this in turn had a disproportionate effect on those

Producers who had already established themselves as Class 1 Producers because it allowed the

other Producers to obtain a greater share of new Quota and the exempt Quota assigned was

nominal.

During the course of negotiations with the Producers leading up to the enactment of the

1978 amendments, a compromise was reached in which Producers agreed to expand the

Producer-Handlers' Quota exemption to allow Option 70 Producer-Handlers to increase their

Quota exemption to equal their original Quota plus any additional Quota purchased prior to

1978. Option 70 Producer-Handlers also received an additional daily Quota exemption of 150

79052435.2 0055675-00001


May 27, 2015Page 11

pounds of fat and 375 pounds of solids not fat, provided they had not transferred production Base

and pool Quota after February 9, 1977.

In 1993, Producers drafted a Quota reform bill that they viewed as essential to their

livelihood. Again, after a negotiated compromise was reached with the Producer-Handlers, the

1993 legislative amendments expanded the Producer-Handlers' Quota exemption to cover all

original Quota and all Quota subsequently purchased, plus the additional daily Quota exemptions

of 150 pounds of fat and 375 pounds of solids not fat that were allowed as a result of the 1978

amendments. This allowed the Producer-Handlers a one-time opportunity to convert a certain

amount of non-exempt Quota into exempt Quota. Additionally, for a period of only one year, the

Producer-Handlers could sell or buy exempt Quota from other Producer-Handlers.

VI. Current Status of Producer-Handler Quota Exemption

Following the 1993 amendments, Option 70 Producer-Handlers were allowed to purchase

Quota. The number of Producer-Handlers went from 49 in 1969 to four by 2015. The Producer-

Handlers who purchased Quota that would be designated as exempt paid millions of dollars and

had to ensure that their business structures were set up to comply with the stringent requirements

that would allow them to maintain their exempt Quotas for the years to come.

The CPHA represents the remaining Producer-Handlers with exempt Quota today. The

amount of Quota that was allowed exemption treatment froze at the end of 1994, and there is no

mechanism for the Producer-Handlers to increase their exempt Quota, transfer their exempt

Quota, or otherwise dispose of their exempt Quota (that maintains the exemption treatment).

Producer-Handlers can only lose the exemption for the Quota if they fall outside of the

enumerated legislative requirements.

In January 2015, the Producer-Handler production under Option 70 represented only

3.8% of the Class 1 milk production in California, while the exempt solid non-fat exempt Quota

Producer-Handler production represented only 0.6% of the total milk production in California.

See Exhibit B. The Producer-Handlers' Quota exemption is relatively insignificant in terms of

overall production and its cost, but is critical in allowing Producer-Handlers to remain

economically viable.

VII. Producer-Handlers Established Business Model on Quota Exemption

Each Producer-Handler that maintains an exempt Quota today has structured its business

and operations in reliance on the Pooling Act going back to 1967, and through each amendment

79052435.2 0055675-00001


in 1978 and 1993. The following is a more detailed overview of each Producer-Handler, how it

acquired its Quota, and the history of its operations.

A. Foster Dairy

Foster Dairy has roots dating back as far as the 1920s. Today Foster Dairy has five

separate milking sites in Hickman, California and its administrative offices and processing

facilities in Modesto, California. The dairy side of the business, Foster Farms Dairy, was

originally founded in 1941 by Max and Verda Foster, and the same family still owns and

operates the dairy today, selling branded products as Crystal Creamery.

Foster Dairy specifically structured its company as a Producer-Handler, utilizing the

Quota exemptions since the inception of the Pooling Act in 1967. Foster Dairy was assigned an

initial Quota and Base in 1967 with the enactment of the Pooling Act, which increased with the

1978 amendments, increased more each year or so with assigned Class 1 growth up to January 1,

1992, and increased for the final time with the purchase of Quota as allowed by the 1993

amendment.

B. Producers Dairy

Producers Dairy was founded in 1932 in Fresno, California. For three generations the

Shehadey family has owned and operated the company with a focus on nourishing lives. It

places a high value on family, which is something that the company has translated into how it

engages and cares for its employees. Through their hard work and commitment, the company

has consistently produced high-quality products and achieved excellence in the level of service it

provides to its many customers.

This has allowed Producers Dairy to continue to invest in growth and in the communities

in which it operates. The consistent combination of nourishing the lives of employees,

consumers, and community has been at the core of Producer Dairy's success and has allowed the

company to enjoy an extremely positive reputation. Today, the company distributes fresh dairy

products throughout Northern California and is proud to be one of the few remaining family-

owned dairies.

Producers Dairy was initially issued exempt Quota in 1969, was assigned growth exempt

Quota up until 1992, and then purchased additional exempt Quota under the last amendment to

the Pooling Act. Producers Dairy has made conscious business decisions in order to maintain the

exemption treatment for its Quota.

79052435.2 0055675-00001


May 27, 2015Page 13

C. Rockview

Rockview was originally founded in 1927. Pete DeGroot, arriving in Southern California

from Holland, turned an insolvent dairy into a solvent, growing dairy, and today it remains a

family-owned business. Initially operating as only a Producer, Rockview became a Producer-

Handler prior to the enactment of the Pooling Act. In 1965, when Rockview's Handler declared

bankruptcy, Mr. DeGroot purchased the processing facility. For 50 years Rockview has operated

as a Producer-Handler, making branded products it sells directly to retail accounts.

Rockview operates its fluid milk processing plant in Downey, California, where it

receives raw milk delivered by tanker trucks. It has a warehouse for refrigeration storage and

distribution in South Gate, California. Its Producer farms are located in Chino and Corcoran,

California, with one of its farms producing over 97% exempt Quota milk. Rockview milks 4000

cows on two farms, employing nearly 300 individuals in California.

As with the other Producer-Handlers, Rockview was initially assigned exempt Quota in

1967. Over the years, Rockview has grown its exempt Quota through growth allocations and

conversions under the Pooling Act. Rockview has invested in its entity and maintaining its

exempt treatment for its Quota.

D. Hollandia Dairy

Hollandia Dairy began in 1949, just a year after the deJong family moved from Holland

to Poway, California with $32 in their pocket. Over the past 66 years, the deJong family has

grown the Hollandia Dairy into a viable family-run business.

Hollandia Dairy's farm in Escondido produces milk picked up by its raw milk tankers

and driven to its milk processing plant for its own distribution. Today, Hollandia Dairy delivers

fresh milk and by-products to all of San Diego County and Orange County, and to portions of

Los Angeles, Riverside, and San Bernardino Counties. From its processing facilities, it offers

fresh Hollandia branded and private label products including milk, flavored milk, buttermilk,

egg nog, half-and-half, whipping cream, cottage cheese, yogurt, sour cream, ice cream, and ice

cream novelties. Hollandia Dairy is one of the oldest independent Producer-Distributor dairies in

the State of California and relies on its exempt Quota as part of its critical business structure.

Initially, Hollandia Dairy was assigned its exempt Quota through two separate farms and

plants, which were later merged into one in 1973. Since its original assignment of exempt Quota

with the enactment of the Pooling Act, Hollandia Dairy has grown its exempt Quota on a regular

basis until its last purchase in 1995. Hollandia Dairy received Class 1 growth assignments of

79052435.2 0055675-00001


exempt Quota after the 1978 amendments, and invested significant sums of money to purchase

exempt Quota in 1994 and 1995. Going through a merger in 2003, Hollandia Dairy carefully

structured its business entities so as to preserve and protect the investment it had made in the

exempt Quota treatment.

E. CPHA Quota and Exempt Quota

Together, the four Producer-Handlers hold a total of 81,992.28 pounds per day of exempt

Quota, and a total of 77,972.80 pounds per day of Base. They also produce Overbase that is not

quantified by set volumes, but instead subject to whatever amount of production exceeds their

Quota, exempt Quota, and allocation of Base. Compare that to the 41.06 billion pounds of milk

produced in California in 2014.

While some of the exempt Quota was assigned to the Producer-Handlers based on their

historical production and sales of Class 1 milk, under the 1994 amendment to the Pooling Act,

the Producer-Handlers were given a short window of time within which to purchase additional

Quota that could be treated as exempt. Between 1994 and March 1995, the Producer-Handlers

collectively invested $9,298,677.84 to acquire Quota that would receive the exempt treatment.

In sum, the Producer-Handlers have invested considerable sums of money to acquire the

exemption treatment for their Quota. They have likewise made strategic business decisions with

respect to ownership and their business models in order to preserve the treatment for the exempt

Quota.

VIII. Comparison of Current California Producer-Handler to "Producer-Handler"

Definition in Proposed FMMO

A. Proposed FMMO

The Cooperative entities have proposed language for an FMMO for California (February

3, 2015 submission).1° Their proposal would exempt from the pool plant any "producer-handler

as defined under any Federal order." Proposed FMMO § 1050.7(f)(1).

10 By letter dated April 9, 2015, the Dairy Institute of California submitted a letter to the USDA along with

an alternative proposal for a California FMMO. See Attachment 1, available at

http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELPRDC5111114 (last visited May 22, 2015). The

Dairy Institute's alternative proposal retains a Quota system by reference to the California Food and Agriculture

Code. See id. § 1050.11(a) (defining "California Quota Program" to mean certain applicable provisions of the

California Food and Agriculture Code). Notably, the Dairy Institute's alternative proposal does not recognize

79052435.2 0055675-00001


The Cooperatives' proposed FMMO is modeled after the California Plan with respect to

regular Quota, but does not recognize exempt Producer-Handlers as part of the Quota system that

currently operates under Article 6.5 of the Plan quoted above. The Cooperative entities proposed

the following definition for Producer-Handler:

(a) Operates a dairy farm and a distributing plant from which

there is route disposition in the marketing area, from which total route disposition and packaged sales of fluid milk products to otherplants during the month does not exceed 3 million pounds;

(b) Receives fluid milk from own farm production or milk thatis fully subject to the pricing and pooling provisions of the order inthis part or any other Federal order;

(c) Receives at its plant or acquires for route disposition nomore than 150,000 pounds of fluid milk products from handlersfully regulated under any Federal order. This limitation shall notapply if the producer-handler's own farm production is less than150,000 pounds during the month.

(d) Disposes of no other source milk as Class 1 milk except byincreasing the nonfat milk solids content of the fluid milk products;

(e) Provides proof satisfactory to the market administrator thatthe care and management of the dairy animals and other resourcesnecessary to produce all Class 1 milk handled (excluding receiptsfrom handlers fully regulated under any Federal order) and theprocessing and packaging operations are the producer-handler'sown enterprise and at its own risk; and

(f) Any producer-handler with Class 1 route dispositionsand/or transfers of packaged fluid milk products in the marketingarea described in § 1131.2 of this chapter shall be subject to §1000.76(a) and payments into the Order 1131 administrative fundprovided such dispositions are less than three million pounds in the

special Producer-Handlers as does the CDFA Plan, and excludes Producer-Handlers as defined in any federal order

from the definition of Handlers. Id. § 1050.12(b). CPHA proposes that, if the Dairy Institute's proposal is adopted,

it be modified to include preservation of the Pooling Act's treatment for exempt Quota.

79052435.2 0055675-00001


May 27, 2015Page 16

current month and such producer-handler had total Class 1 route

disposition and/or transfers of packaged fluid milk products from

own farm production of three million pounds or more the previous

month. If the producer-handler has Class 1 route disposition

and/or transfers of packaged fluid milk products into the marketing

area described in § 1131.2 of this chapter of three million pounds

or more during the current month, such producer-handler shall be

subject to these provisions described in § 1131.7 of this chapter or

§ 1000.76(a).

Attachment A to February 3, 2015 Letter to Anne Alonzo, Administrator, Agricultural Marketing

Service, United States Department of Agriculture, "Proposed Language for the California Milk

Marketing Order" (emphasis added).

Under this proposal, if a purported Producer-Handler produces more than 3 million

pounds per month of milk, all of the Producer-Handler's milk would be subject to the pool plant.

It is an all-or-nothing determination.

B. Current California Producer-Handler Exemption Comparison

The proposed California FMMO attempts to preserve the regular Quota but does not

preserve the Exempt Producer-Handler Quota that has always been a part of the California

Pooling Act Quota System. None of the current Producer-Handlers who are exempt under the

California Quota system would be exempt under the proposed California FMMO.

First, the Cooperatives have not proposed preservation of the California Pooling Act

definition of exempt Producer-Handlers. Instead, the Cooperatives propose a new definition of

Producer-Handlers, with a threshold amount (3 million pounds per month) under which a

Producer-Handler must stay in order to qualify. Under the current Pooling Act, without regard to

the size of an exempt Producer-Handler's overall operations, production, or sales, the Exempt

Producer-Handlers receive their exempt Quota treatment for all assigned volumes. Any surplus

amounts are paid out as regular Quota, Base, and Overbase subject to Pooling. But they are

permitted to have at least a fixed portion of their Quota treated as exempt, without risking losing

it by growing their business.

Second, the California Pooling Act does not have an all-or-nothing determination.

Rather, the Pooling Act allows a certain portion of the Quota to be exempt, while other Quota is

non-exempt and subject to Pooling (depending on when the Quota was acquired and whether the

79052435.2 0055675-00001


qualifications have been met since that acquisition). In other words, Producer-Handlers have a

specified amount of Quota that is treated as exempt, but they also have Quota that is subject to

Pooling, and Base. The exempt Quota is a specific volume amount that does not change, cannot

increase, cannot be sold, and cannot be transferred (except as regular Quota subject to the pool).

But it can be held alongside regular Quota that is subject to Pooling.

Additionally, none of the exempt Producer-Handlers (CPHA) would qualify as a "small

business" under the FMMO, as they each have gross revenues that exceed $750,000.

In short, with the proposed California FMMO language, all of the current exempt

Producer-Handlers who hold exempt Quota from Pooling would be subject to Pooling,

eliminating nearly all of the value in the investments and strategic business decisions they made

over nearly 50 years to maintain their respective exempt Quota.

Recommendation

CPHA urges preservation of the entire Quota System that have become the backdrop

against which the last remaining Exempt Producer-Handlers have invested and structured their

businesses for the past 48 years. The 2014 Farm Bill specifically contemplates preservation of a

Quota System, that has always recognized both Regular Quota and Exempt Quota since the

inception of the Pooling Act in 1967.

In order to accomplish this recommendation, CPHA proposes one of two methods. First,CPHA proposes preserving the California Pooling Act Plan §§ 115, 121, 129 and Article 6.5 §§650-657 addressing Exempt Quota, and defining Exempt Producer-Handlers, their requirements

and administration under the Pooling Act by the CDFA. By preserving these sections, in

addition to the Regular Quota sections proposed for preservation by the Cooperatives and Dairy

Institute proposals, it will preserve the entire Quota System as is contemplated by the 2014 Farm

Bill.

Second and alternatively, if the California FMMO is intending to address the Quotasystem in its own FMMO regulatory framework, then CPHA proposes that the FMMO adopt theExempt Producer-Handler definition, along with the California Pooling Act sections identified inthe preceding paragraph to allow CPHA to preserve its exempt Quota treatment along with the

rest of the Quota System.

Remove Degrees of Family Consanguinity. The CPHA further proposes that the

degrees of family consanguinity be removed to allow for a continuation of transfers within the

79052435.2 0055675-00001


family definition. This would allow for the Producer-Handlers to continue to maintain the

CPHA as a family-run organization so long as they do not transfer the entities out of the family

ownership structure. However, if the California FMMO does not suspend the California Pooling

Act requirements for consanguinity, then CPHA will voluntarily withdraw this aspect of the

proposal with the understanding that it will be governed by the state order system.

Proposed Language for Exempt Quota Preservation. CPHA proposes that thelanguage of the California Pooling Act, as quoted above, pertaining to exempt Quota be

preserved as part of the Quota system that was contemplated to be preserved by the 2014 Farm

Bill.

Thank you for your time in review of this proposal. If you have any questions, you can

reach me at 208-387-4231 or nicole.hancock@stoeLcom.

Very truly yours,

Nicole C. Hancock

79052435.2 0055675-00001

RIVES Boise, Idaho 83702

Documents